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January 10, 2018

10 Years After The 2008 Peak

On Jan 8 2008, the BSE Sensex closed at a then all-time high level of 20,873. This week, as it hit new all-time highs, I have been poring through performance numbers of equity funds over these last 10 years. In this post, I’d like to share some of my observations and thoughts.

Is this what we expected?“How much return would you expect the Sensex to give over a 10 year period?” Back in the day, I would pose this question to advisors and investors, as part of a long-running series of exercises that I conducted. Throughout 2007-08, the most common answer I got was “at least 15% p.a.”. It was an understandable response. The growth in the Sensex from its base date in 1979 to its value at the end of December 2007, stood at just over 20% p.a. (without reinvesting dividends). Some would consider the estimate of 15% p.a. to be too high. The most conservative estimates that I heard were of a growth of no less than 10% p.a. Yet, the fact is that over the last 10 years, the BSE Sensex TRI grew by just 6.6% p.a. The BSE MidCap TRI did a bit better, growing by 7.9% p.a. And for whatever you may find it worth, the BSE SmallCap TRI grew by just 5.3% p.a. All these numbers pale in comparison to the fact that a 10 year deposit with SBI over the same period would have given an assured compounded annualized rate of 8.78%.

So, going forward, could such long-term underperformance by equity indices be a more frequent occurrence, or is this just a blip? When I discussed these numbers with a prominent industry observer, he responded with a quote that is frequently attributed to Keynes: “Markets can remain irrational far longer than we can remain solvent.”

How much value did actively managed funds really add?Of the 140 actively managed, domestic, diversified equity funds that survived these 10 years, only 2 schemes gave an annualized return in excess of 15% p.a. While the median return of this group was 9.2% p.a., 61 schemes (i.e. 44% of all schemes) gave less returns than the SBI deposit would have. Of these, 28 schemes (20%) gave less returns than the BSE Sensex. All these numbers exclude entry loads, which were prevalent at the time.

How did the largest schemes perform?The table below gives the list of the largest equity funds (by AUM) at the end of December 2007 along with their returns over these 10 years. Some of the names on this list may surprise those who weren’t investors at the time. I can’t say how many investors were committed to being invested in these schemes for 10 years or more. For those who were, it is a moot question as to whether their faith in these schemes was justified. For better context, I have also given the ranking of these schemes based on their return.

AUM RankDec 2007

Return p.a.2008-2018

Return Rank2008-2018

Reliance Growth Fund

1

9.9%

72

Reliance Diversified Power Sector Fund

2

4.1%

181

HDFC Equity Fund

3

11.4%

37

ICICI Prudential Infrastructure Fund

4

4.8%

173

DSP BlackRock India T.I.G.E.R. Fund

5

5.6%

155

Reliance Vision Fund

6

7.8%

116

Fidelity Equity Fund*

7

10.2%

65

Franklin India Flexi Cap Fund

8

10.2%

66

SBI Magnum Taxgain Scheme

9

8.2%

105

Reliance Focused Large Cap Fund

10

5.6%

156

Returns are for the period 8 Jan 2008 to 8 Jan 2018 and exclude loads. AUM and Return ranking is among all open-end equity funds that survived these 10 years. Total no of funds: 202.* This scheme has seen a change in fund house management from 2008 to 2018.Data/ Information sources: AMFI, NJ India Invest, Value Research

How many of us could predict the top performers?The table below gives the list of domestic, diversified equity funds which gave the highest return over these 10 years. Alongside I have given their ranking among equity schemes based on their current AUM, as well as their AUM ten years ago. Going by their AUM ranking ten years ago, it would seem that most investors weren’t betting big on most of these schemes.

Return p.a.2008-2018

AUM RankDec 2007

AUM RankCurrent

HDFC Mid-Cap Opportunities Fund

16.5%

36

4

DSP BlackRock Micro Cap Fund

16.0%

108

26

ICICI Prudential Value Discovery Fund

14.7%

97

5

Canara Robeco Emerging Equities Fund

14.5%

257

59

Franklin India Smaller Companies Fund

14.2%

49

23

Sundaram Select Midcap Fund

14.0%

19

29

DSP BlackRock Small and Mid Cap Fund

13.8%

44

35

IDFC Premier Equity Fund*

13.6%

77

30

UTI Mid Cap Fund

13.5%

114

44

L&T Midcap Fund*

13.4%

239

86

Returns are for the period 8 Jan 2008 to 8 Jan 2018 and exclude loads. AUM ranking is among all open-end equity funds. Current AUM ranking is based on AUM at end of Nov 2017 which is the latest date for which data was available across all fund houses. Total no of funds- Dec 2007: 287; Current: 385. * These schemes have seen a change in fund house management from 2008 to 2018.Data/ Information sources: AMFI, NJ India Invest, Value Research

How important is the long-term performance of a scheme to investors?This is the question that bothers me the most. It is widely recognized that a scheme’s long-term, multi-cycle performance is a good indicator of a fund management team’s competence. However, if the current AUM of equity schemes is anything to go by, it would seem that long-term performance of a scheme doesn’t really matter to many investors. As evidence, consider this: three of the ten largest actively managed, diversified equity funds today, did not exist 10 years ago. These three schemes currently have a combined AUM of ~47,000 crore. In other words, investors have poured significant money into schemes that were not tested in the brutal bear phase of 2008-09. I find it all the more astonishing given that two of the fund houses behind those schemes had a patchy record with their other schemes during 2008-09 while the third fund house itself did not exist at the time (nor did its sponsor have any known track record of fund management).

That’s not all. There is one more statistic that quantifies the lack of consideration for long-term performance. It is that the actively managed, domestic diversified schemes that actually underperformed the BSE Sensex over the past 10 years currently have a combined AUM of ~19,000 crore. If you include thematic/ sector funds, that number goes up to ~32,000 crore.

Warren Buffett famously stated that risk comes from not knowing what you are doing. While past underperformance (or absence of performance) is no guarantee of future underperformance, I hope investors in all these schemes know what they are doing.